Future146;s Favourite

Our Middle East neighbours also have vast accumulations that should eventually find their markets in India. Second gas offers a relatively competitive alternative to oil products. Its international price today is considerably lower than, for instance, naphtha. Third it is an efficient fuel.

A combined cycle gas-fired power plant can achieve thermal efficiencies of more than 60 per cent compared to 40-45 per cent for the latest coal technologies and 30 per cent for the average plant in India. And finally it is a relatively clean fuel. It emits little if any sulphurous oxides and significantly lower levels of greenhouse gases like carbon dioxide than the other fossil fuels.

These 8216;8216;good8217;8217; reasons provide the necessary conditions for the accelerated growth of gas. But they do not assure the trend. That depends on three additional conditions 8212;the creation of the transportation and distribution infrastructure to bring the gas from the production point to the consumer; the establishment of the market to absorb the gas, and the setting up of a regulatory regime to ensure a competitive business environment.

Unfortunately, these three conditions are not yet fully in place in India. Unlike oil, gas is not fungible i.e. tradeable. It cannot in normal conditions and except for short periods be stored. It has to be consumed upon production or else flared. This means that the various segments of the 8216;gas value8217; chain from production to transportation/shipping/pipeline to the final consumer have to be simultaneously developed. This in turn requires a coordinated effort by diverse stakeholders.

Unfortunately this effort has fallen short in India for a number of reasons. First, the stakeholders 8212;the petroleum companies and the anchor customers in the power and fertilizer sectors8212; have understandably separate commercial agendas. Second, they operate under different government ministries. Thus the Ministry of Petroleum 8216;8216;controls8217;8217; the production and transportation of gas; the Ministry of Power influences the fuel choice of the generating companies and the Ministry of Fertilizer sets the price subsidy structure for the fertilizer companies.

In addition there are the Ministries of Coal and the Planning Commission. The challenge of bringing these bodies together to adopt an integrated view on the future role of gas has yet to be overcome.

And finally the business of gas production, distribution and marketing is hugely capital intensive. A liquefied natural gas LNG project for instance can cost upwards of Rs 15,000 crore. 3-4 billion. The bulk of this investment is for the development of the gas reserves and its liquefaction 2 billion approx; but thereafter there is the cost of shipping8212; each bulk LNG tanker has a price tag of 150-200 million; the cost of regassifying the liquid back to gas the regas terminal involves an investment of approximately 500 million and the cost of the pipeline to bring it to the market8212; the cost would depend on the distance. The financing of such projects has never been easy. Bankers have generally been reluctant to lend other than to companies with solid balance sheets and on the assurance that customers can sustain payments over the duration of a gas supply contract. This is one reason why historically the LNG business has been run predominantly by the large majors.

Most studies project a growing demand for gas. This, however, presumes that the anchor customers8212; the power sector and the fertilizer companies will readily switch to gas. This could be an overoptimistic assumption. For both have alternative options.

Coal is an abundant resource and therefore the logical fuel source for power generation. It has of course several offsets. There is the not insignificant cost of transporting it from the pithead to the plant. And also if imports are contemplated the cost of building the port and other infrastructural facilities. Further the environmental implications of enhanced carbon dioxide emissions cannot be ignored. Still the question has yet to be been consensually answered whether diseconomies will shift the balance in favour of gas and if so to what extent.

The fertilizer sector should also not be presumed upon as a driver of gas demand8212;notwithstanding the compelling economic logic given that gas is cheaper. The reason is the current pricing and subsidy structure. Fertilizer companies are today reimbursed the cost of these fuels and have therefore little incentive to select the least expensive alternative. The government will have to alter this structure before they are willing to contemplate gas. There is also the issue of comparative economics. The option of importing urea from the Middle East does also exist.

The regulatory regime is perhaps the most crucial missing ingredient today. The Petroleum Regulatory bill has recently been legislated and this does lay out the contours of the future regime. It calls for the appointment of an independent Regulator and tasks it to achieve essentially three objectives8212; the creation of a competitive environment and a level playing field for all players8212; producers, transporters and consumers; the ability for consumers to negotiate on an arms length and transparent basis access to the cheapest source of gas; and finally the operation of the industry to the highest technical, safety and environmental standards. The regulator has yet to be appointed and the bill implemented. But if indeed these objectives are fulfilled and in particular the conditions created by which the gas marketing entities have equal access to the pipeline grid and the consumers are able to select fuel on the basis of market determined prices then the core conditions for the rapid development of gas would be materially fulfilled.

On the eve of World War I, Winston Churchill, as first lord of the Admirality, directed that the British Navy should be powered by oil rather than coal. That triggered the displacement of coal as the fuel of the industrial economy. It also elevated energy security into a strategic national priority and Britain moved aggressively to secure its oil supplies from a variety of sources. Today, almost one hundred years later we face a not too dissimilar situation. Energy security is crucial to our current growth path. And we do need to diversify supplies. Gas can mitigate the risk but what is now required is for the relevant authority to don the Churchillian garb and direct the fulfillment of the remaining conditions for its further development.

The author is chairman of the Shell Group of Companies in India. The views expressed are personal